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What is the appropriate journal entry for a Tenant improvement allowance where funds were drawn from the landlord?

Maria L Rodriguez's Profile

Accounting For Tenant Improvement Allowance


Stuart Brown
Title: CFO
Company: Red Robin
(CFO, Red Robin) |

Typically, for a tenant, it follows who "owns" the assets (think about who pays taxes and insures). If the tenant asset, the asset should be set up and a corresponding credit to deferred rent which is amortized over the life of the lease. The best lease accounting guidance that I have seen is the EY FRD on Leases which I think is available free on their website or can be found through a web search.

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

Very useful references. Stuart, your answer is correct, except that technically the asset would be amortized over the life of the lease or the useful life of the improvements, whichever is shorter. In practice it's hard to imagine a scenario where the useful life would be less than the life of the lease.

Raj Bathini
Title: Consultant
Company: SolomonEdwards
(Consultant, SolomonEdwards) |

I understand that the lease improvements paid by Landlord have to be treated as a liability (Deferred Rent) and amortized (ie: will be reduction of rent) through the lease duration.

My question is how this be impacted for a lease extension. Do we redo the amortization or just start from scratch. Any guidance would really help. Thanks in advance

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

Under U.S. GAAP the deferred rent would be amortized over the term of the new lease.

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Raj – I will provide a scenario because I am not exactly sure what you’re asking.
Scenario: You have a mid-term tenant improvement that takes part in year 7 of a 15 year lease. For simplicity sake let’s consider it happened in December of year 7 for $64,000. You will amortize $8,000 per year until the end of the 15 year lease. If you are given an option to renew and you decide to renew at that point, that doesn’t trigger a reason to start re-amortizing after you’ve exercised the option. The reason is because you should have exhausted the amount to be amortized.

A caveat to this is how likely are you to renew the lease? If you are more than likely to renew the lease then you must tack on the additional period of time. If you choose to renew after you thought you wouldn’t, then you may have an accounting restatement on your hands.

Does that make sense? I hope that answered your question.


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